ERCOT Struggles to Meet the Electricty Demand

By Rebecca Smith of WSJ
May 4, 2011

Peak electricity demand in sweltering Texas this summer already has surged past levels that weren't expected until 2014, exposing a shortage of generating capacity likely to persist for several years.

For the second year in a row, the organization responsible for the stability of Texas' electrical grid, the Electric Reliability Council of Texas, has grossly underestimated summer demand in its forecasts. Last week, demand was so high across Texas that some large energy users had power disruptions, and Ercot narrowly avoided instituting rolling blackouts.

Ercot's forecasts are based on an average of the past 10 summers, but the past two years have been unusually hot, pushing up energy use for air conditioning. Electricity demand in July was 12% higher than for any prior July.

"July was the hottest month ever in Texas, and August is shaping up to be the same," said Kent Saathoff, vice president of system planning for Ercot.

Ercot's struggles to meet demand carry a cost. Wholesale power prices during the emergency last week rose to 60 times normal summer prices, racking up millions of dollars of added costs for consumers and power retailers. By Thursday, prices had dropped back down to a normal range of $20 to $50 a megawatt hour.

The emergency shines a light on the vulnerabilities of Texas' deregulated market. The state's grid barely connects with other states, which means Texas can't get help from other places when it runs short of power.

In addition, state officials have few tools to stimulate construction of new power plants. In the 75% of Texas that is part of Ercot's deregulated power market, regulators can't order utilities to build more generating plants; they have to wait for power generators to build new plants voluntarily.

Two big new plants are expected to enter service next year, but that may not be enough to relieve the worsening shortage, said Mr. Saathoff.

Last week's emergency was unusual, because power plants are expected to be ready to meet high summer demand, and typically do routine maintenance in fall or spring, when demand is lower. But as much as 5,000 megawatts of generating capacity has been unavailable at times this August.

If another 1,000 megawatts had been unavailable Aug. 4 the grid operator would have had to order rotating blackouts to prevent a possibly larger problem for the system.

While most power in Texas sells for negotiated prices spelled out in long-term contracts between generators and power retailers, the grid operator also procures electricity to keep the system in balance. The price paid in this auction readjusts every 15 minutes. When supplies are thin, prices can rise rapidly.

As a result of record electricity consumption, prices repeatedly hit $3,000 a megawatt hour last week, which is three times the maximum amount that generators can charge in deregulated electricity markets in the eastern U.S. (Electricity markets in Texas have rules created by state authorities, whereas other deregulated U.S. power markets are guided by the Federal Energy Regulatory Commission.)

In California's energy crisis a decade ago, unscrupulous power generators feigned equipment problems at power plants to keep units out of service and drive up electricity prices. Eventually, some generators paid millions of dollars in penalties for their actions.

High prices in Texas could attract regulatory scrutiny. The official watchdog for Texas electricity markets, market monitor Daniel Jones of Potomac Economics, said his team constantly analyzed market events and, "if our regular analysis indicates the need for a more formal investigation, we will proceed."

Records for peak energy use were set on three successive days, Aug. 1-3. The new record now sits at 68,294 megawatts, from Aug. 3. That's getting close to the Ercot's maximum supply of about 72,000 megawatts, and some units are usually down for repairs.

As recently as June, Ercot said that it didn't expect to break any records this summer, and that it saw summer peak demand remaining manageable until 2014, when it thought supplies could run thin in the fast-growing state.

But the old record of 65,776 megawatts, from last summer, has now been exceeded on eight days in August.

Last week's electrical emergency was the second one this year. Texas consumers suffered rolling blackouts in February during a surge in electrical demand caused by an unusual cold snap. Some 152 generating plants were unavailable at times in early February, more than double the number out of service earlier this month.